A Time and Materials (T&M) contract is normally used in construction and product development when a company or employee agrees to be paid for their time and the material used for the development of a product. T&M contracts are used when you can not estimate the size of the project or any of the changes that can occur while in development. A T&M contract is the opposite of a Fixed-Price Contract.
Definition: A Time and Materials (T&M) contract is an agreement between two or more parties describing the rough scope of a task based on an hourly fixed wage plus the cost of materials to complete the task.
Time & Materials (T&M) Contract Basis
A Time & Materials (FAR Subpart 16.6) contract provides for acquiring supplies or services on the basis of 
- Direct labor hours at specified fixed hourly rates that include wages, overhead, general and administrative expenses, profit; and
- Actual cost for materials (except as provided for in 31.205-26(e) and (f)).
Time & Materials (T&M) Contract Regulations
The main regulations that govern T&M contracts within the defense acquisition System are listed below.
Application: Time accurately the extent or duration of the work or to anticipate costs with any reasonable degree of confidence. See FAR 12.207(b) for the use of time-and-material contracts for certain commercial services.
When to Use a Time & Materials (T&M) Contract
A time and materials contract should be used when there are too many uncertainties in contract performance that will not allow the use of a fixed-price contract. When the scope of the job or its duration cannot be established before work begins, as is occasionally the case with building projects, time and materials contracts are the best option.
How to use a Time & Material (T&M) Contract
On the project’s objective and the desired outcome, the client and contractor concur. It might not be possible to outline every stage of the process. They settle on hourly pay for both the contractor’s employees and subcontractors within that framework. Along with markup for material pricing, the contractor also defines the materials that will be used.
Time & Material (T&M) Contract Should Include
A time and materials contract should outline the project’s objectives and contain a fixed price for labor that accounts for wages, overhead, general and administrative expenses, as well as a profit margin. Freight, taxes, and markup should be included in the materials cost. Where necessary, the contract should additionally include a not-to-exceed clause that specifies a maximum price.
Benefits of a Time & Materials (T&M) Contract
- Easy to adjust to requirements changes
- More flexibility over schedule changes
- Easier contract setup
- Ensures contractor will earn a profit
Downside of a Time & Materials (T&M) Contract
- The customer takes a lot of financial risks
- Tracking expenditures take more effort
- No incentive for being efficient
- Rising labor prices could eat into profit
Time & Materials (T&M) Contract Limitations
A Time-and-Materials contract may be used only if:
- The contracting officer prepares a determination and findings that no other contract type is suitable. The determination and finding shall be:
- Signed by the contracting officer prior to the execution of the base period or any option periods of the contracts; and
- Approved by the head of the contracting activity prior to the execution of the base period when the base period plus any option periods exceeds three years; and
- The contract includes a ceiling price that the contractor exceeds at its own risk. The contracting officer shall document the contract file to justify the reasons for and amount of any subsequent change in the ceiling price. Also, see 12.207(b) for further limitations on the use of Time-and-Materials or Labor Hour contracts for the acquisition of commercial items.
“Direct materials” means those materials that enter directly into the end product, or that are used or consumed directly in connection with the furnishing of the end product or service.
“Hourly rate” means the rate(s) prescribed in the contract for payment for labor that meets the labor category qualifications of a labor category specified in the contract that is:
- Performed by the contractor;
- Performed by the subcontractors; or
- Transferred between divisions, subsidiaries, or affiliates of the contractor under common control.
The difference is fixed-price contract provides for a price that is not subject to any adjustment on the basis of the contractor’s cost experience in performing the contract. Where a time and Materials contract provides for a cost adjustment.
Other Types of Contracts
AcqLinks and References:
-  Website: Subpart 16.6 – Time-and-Materials, Labor-Hour, and Letter Contracts
- OSD Time-and-Materials and Labor-Hour Contracts The New Policies
- Guidance: Audit on Time-and-Materials (T&M) and Labor Hour (LH) Contracts
- Template: Boeing Time and Material Contract Template
- Guidelines: Preparation of a General Services Time and Materials Contract
- Website: FAR Subpart 16.2 – Contract Types